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World of Wimps

A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.

attributed to Alexander Fraser Tytler by Elmer T. Peterson (1951)

Voting for ever more largess out of the public treasury has been the story of industrialized countries for the last 100 years. No matter who was actually in power, governments readily delivered to the masses. Central banks were founded in order to increase taxes (by constant inflation) and to smoothen business cycles. To nobody’s surprise, people liked it. Everybody hates to be unemployed, even if it is for only a short period of time. The “terror” of business cycles puts pressure on people to adjust themselves to changing conditions multiple times during their lives. Governments and the central banks promised to fight the “terrors” of business cycles. And they were successful: Never before had developed economies such low output volatility (HT to John Lohman @ZeroHedge).

However, as Captain Capitalism recently mused, (not only) Americans have become cowards. I say this is the result, not the cause, of governments and central banks deceiving us, making us believe that we can have prosperity and progress without hardship and trial. It is part of human nature to have ideas and to try making them reality. Some fail, some work. Humans are also emotional. They ride the ups and downs of collective emotions of a society, also called “The Business Cycle”. Abolishing the business cycle has been one of the main goals of communism for a reason. Economies (or industrial societies, if you will) cannot exist without business cycles, like they cannot exist without prices. They both have important signaling functions. They show us value and risk. And so it is no surprise that we are experiencing the biggest accumulation of bubbles ever in the history of mankind exactly in times of low volatility, i.e., low perceived risk (again, HT to John Lohman @ZeroHedge for pointing this out).

It is my personal experience that the younger generations, born after 1970, tend to show alarmingly low levels of risk-appetite and decisiveness regarding their carrers and their personal relationships. They were born into an era of perfect inflation and output targeting, unemployment insurance, free education, free internet, free songs, free gaming through illegal downloads, etc. Even when young people go binge drinking, or taking other drugs, they do so in order to get away from “boring real life”.  Guess what, central planning has made our society boring. No wonder that surveys often show young people expressing a lack of prospects in their lifes.

The funny thing (or tragic, depending on how sarcastic you are) is that the central planning policies of governments and central banks are now at a point where they achieve the exact opposite of what they try to do. They cause ever more bubbles (see next banking crisis @The end of civilization), and thereby higher volatility/risk. Markets are now like heroin addicts, waiting for the next shot (markets move ahead @RGE). The bad thing for us is that this kind of risk is bad risk. It is associated with a crippled banking system and an economy that has got used to “privatize wins, socialize losses”. Like ancient Rome, we are now a spoiled society. We are heading towards stagnation instead of progress.

Will democracy be able to withstand the social pressures that will arise from stagnation, i.e., relative impoverishment of large parts of the society? Can it cope with a war of generations between large masses of pensioners and young people without prospects for a growing economy?


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